Owning a business requires careful succession planning and is part of your estate planning as you have to determine who will succeed you, or who will purchase your shares, or who will be entitled to the income after your death. The future ownership of your business is at stake.
A Partnership automatically dissolves upon the death of a partner and the remaining partners will then have to dissolve it and divide the assets amongst them.
In the case of a Company the shareholders may agree that:
The remaining shareholders have a right of first refusal to purchase the deceased shareholder’s shareholding, as opposed to dealing with it in a will.
The future of ownership of shares can be regulated by a written agreement between shareholders that is referred to as “buy and sell” agreement and has an influence at the death of a partner or shareholder.
The buy and sell agreement compels the executor of the deceased to offer the shares at a pre-determined price, and life policies between shareholders normally cover the purchase price.
The remaining shareholders are the beneficiaries of the policy on the life of the deceased and use it to purchase the shares, normally pro rata to the shares they already own.
Buy and sell policies fall outside the deceased estate and are not subject to estate duty provided that three requirements are met:
None of the premiums should have been paid by the deceased;
The shareholder relationship must have existed at the time of death;
A written agreement must exist.
When the skill and knowledge of a partner is essential for the survival of the business, “key man insurance“ can be taken out on the life of such a partner or shareholder. The premiums are paid by the business and the benefit is paid to the business to prevent financial loss or to appoint and train a replacement.
In the case of a “sole proprietor”, succession planning is dealt with in the Last Will and Testament.
All the value of the business vests in the deceased estate.
Planning is essential as the business terminates at death, although the executor may sell it as a going concern.
It is a good idea to grant a right of first refusal to an associate, who can purchase the business and intellectual capital at the time of the death.
A life policy can provide for cover on the life of the owner, with the associate being the beneficiary, and the proceeds at time of the death utilized to purchase the business.
It deserves no debate that planning increases the benefit for the estate as opposed to closing the business down, where the assets will be worth far less.
Continued succession planning must be part of your business strategy to ensure your hard work benefits the right people.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.